Pakistan Urgently Needs Foreign And Domestic Investment To Boost Exports

"The Special Investment Facilitation Council (SIFC) of Pakistan may face hurdles in attracting significant foreign investment due to a lack of focus on structural issues"

Pakistan Urgently Needs Foreign And Domestic Investment To Boost Exports

Pakistan’s economy has been through significant fluctuations this year, bringing it to the verge of default. The economic uncertainty has caused much damage to the country. According to the World Bank, the real gross domestic product (GDP) is estimated to have declined by 0.6 per cent in FY23. The Asian Development Bank (ADB) estimated that Pakistan’s economic growth for this fiscal year will remain at 1.9%. Pakistan’s economic growth is stagnant due to the rise in dependence on imports and low rates of foreign investment, persistently high inflation, weak rule of law, political uncertainty, security concerns, and long-standing difficulties attracting foreign direct investment. While these factors were persisting issues for the country, the Devastating floods in the summer of 2022 and the increase in international prices due to Russia’s war in Ukraine played a pertinent role in crippling Pakistan’s energy and food security resources.

The $3 billion IMF loan agreement and the foreign loans from the Middle East are factors that are sustaining the economy of Pakistan. With our reserves being at 8,221.2 million dollars and billions of dollars of debt, Pakistan is in dire need of foreign investment to boost businesses and exports. Foreign Direct Investment is deemed to be a significant capital income for any country and a portal to the development of advanced technologies, effective industrial growth and marketing networks. A persistent inflow of directed investments opens gateways to the elevated production capacity of the country which aids in employment opportunities and reduces poverty. Furthermore, facilitating public or private investment, in both physical and digital infrastructure lays down an effective and supportive ecosystem for the business community. Hence, enabling greater retention of investments and attracting further potential investors in the economy. Most emerging markets in East Asia reshaped their economy by introducing liberal trade and investment policies in the export-oriented sector that resulted in economic growth. Over the years, the investment-led growth model has proven to generate significant results such as in the next 20 years, China will secure a top position in global manufacturing and export activity. Similarly, India, Indonesia, Vietnam, Turkey, Chile and Peru have all implemented investment policies that have led to foreign investment in the country, enabling them to be considered successful emerging markets.

To foster economic growth and prosperity, Pakistan must reform their system. The prevailing framework is a nightmare for foreign investors, filled with loopholes and considered ineffective. The State Bank of Pakistan’s annual report highlighted that the legal framework often differs from the government policy which adds to investors’ confusion about the domain of investment activities and the incentive structure in the economy. Moreover, the report emphasises that “there are also discrepancies between the acts and the policy on many issues such as the nature of sectors open for investment and rules about minimum domestic input requirements; mechanisms governing the issues of national and equitable treatment of foreign investments; and expropriation and dispute settlement processes.” Furthermore, the ungoverned private sector is filled with multiple complications that are directly hindering growth, particularly the scattered and insufficient nature of investment by the small and medium-sized enterprises activities in Pakistan. The unstructured and ineffective management of small enterprises has led towards their failure to entice investors for growth and innovation. In a nutshell, Pakistan’s economy remains in shambles due to its poor state of human capital development, deteriorated institutional and operational infrastructure, and hybrid government regimes detached from building a proper economic plan revolving around investment retention practices, leaving no ecosystem in place for engaging foreign investors on contract. Consequently, this creates hurdles for investors to establish or expand their business activities in Pakistan without functional assistance platforms.

A new system was needed to attract foreign investors and reassure them of protection. To ensure this, the government enacted the Foreign Investment (Promotion and Protection) Act (FIPPA)  in 2022 which encouraged foreign investment in industrial projects involving advanced technology and heavy capital outlay like engineering, basic chemicals, petrochemicals, electronics, and other capital goods industries. The law provides foreign investments of over $500 million that are designated as “qualified investments” by Parliament with tax incentives and protections. Section 8 of the FIPPA 2022 includes exemptions from federal and provincial taxes, the establishment of an investment ombudsman, and guarantees the ability to repatriate proceeds. It further provides a mechanism by which an investor/company may initiate legal proceedings against the state or contracting Pakistani company for legal issues. The law provided legal cover and granted adequate protection to foreign companies with procedural surety and profit.

The vision to promote foreign investment was illustrated through the 2023 Investment Policy by the government, representing a promising development for investors and a positive stride towards the country's improved economic growth. The government promises to aid investors in any manner possible during the investment period, including entry, implementation, and post-implementation, by enhancing investor facilitation and aftercare services, creating a One Window system specifically designed to provide seamless and efficient business mechanisms for investors. In addition, there is the Special Economic Zones Management Information System to facilitate investors in Special Economic Zones (SEZs). All SEZ-related registrations are now conducted through this online portal. Furthermore, the government plans to Introduce a Business Matchmaking module on the Board of Investment (BOI) website, creating a platform that links investors with potential business partners along with an online portal and helpdesk for the facilitation of investors.

Nonetheless, the implementation of the law is non-existent due to the hurdles caused by the bureaucracy. The business community in Pakistan is reluctant to promote investment as they argue that there is a large gap between government policies and their implementation. The lack of progress on implementation and the uncooperative bureaucracy have led the business community to take a step back.  In addition, given Pakistan’s economic crisis and political uncertainty on elections, the business community’s confidence is decreasing. The business confidence index reveals that community confidence is to remain at a low of 39 scale in the first quarter of the fiscal year of 2024. The decline in business confidence and low investment could also be credited to the rise in policy rate of 22 per cent, increase in import restrictions, and currency depreciation.

The Special Investment Facilitation Council (SIFC) of Pakistan may face hurdles in attracting significant foreign investment due to a lack of focus on structural issues, “the involvement of the military in economic matters threatens the nation’s stability,” according to the Policy Research Institute of Market Economy (PRME) report.  Moreover, it states “the inclusion of the military in economic decision-making without the requisite expertise could not only destabilise the country but also lead to the failure of the key initiative.”  Hence, the constitutional roles must be fulfilled by the institutions and a consensus of the upcoming government with the opposition on a charter of the economy is the way forward for structural reform.

In conclusion, to ensure that Pakistan is a part of the emerging markets of the world, policies encouraging foreign and domestic investment in the export industry are vital. Pakistan requires a balance of trade and a current account surplus which is achievable with development in our export industry by business investors. It is the need of the hour that the new government takes on the challenge of transforming Pakistan into an export-oriented economy rather than the current import-based one. The inclusion of direct foreign investment by the caretaker government policy is a step forward to economic development which the upcoming government should follow. Nevertheless, economic stability is dependent on political stability which is attained through political dialogue and development of the charter of the economy by political parties.